Digital transformation in Japan is necessary in order to achieve sustainable economic growth in a situation of labour force shortages. Regulatory reform of arbitrary bureaucratic procedures and the digital safety of the general public are essential for digital transformation. This rests on Kishida’s strong leadership in persuading the Japanese people to construct a digital society.
Digital transformation in Japan is an essential policy target in Prime Minister Fumio Kishidaʼs “New Capitalism” agenda. Increased investment in digital infrastructure is necessary in order to overcome the labour force shortages brought about by a rapid decline of 10 million in the population of 20 to 64-year-olds in the last 20 years. There is an urgent need to increase labour productivity through digitalisation, particularly in the service sector. One key is reforming the administrative laws and procedures that use traditional schemes such as seals for individual identification so that these are replaced by personal digital numbers. It is the first task of the Digital Agency, which was established in 2021, to revise over 40,000 existing laws and legal procedures in the compartmentalised jurisdictions of various state ministries.
Japanʼs successful digitalisation rests on Kishidaʼs strong leadership in persuading the Japanese people to construct a digital society. In this respect, it was not surprising that Kishida nominated Taro Kono as the Minister for the Digital Agency in the new Cabinet on 10 August, right after the Liberal Democratic Partyʼs victory in the Upper House election. Kono is a rival of Kishida in the LDPʼs top leadership election in 2024.
Toward digital transformation
There are three fundamental steps to realising digital transformation in Japan.
The first step is to improve governance by implementing flexible rules that can quickly adapt to rapidly changing technologies and economic circumstances. Many existing laws for maintaining safety define the detailed process based on old technologies, so that the criteria must be revised. For example, automatic monitoring systems should replace the current schemes based on ad hoc human supervision.
Drones and sensors could quickly replace human observation for regular safety checks on bridges and tunnels. Better regulation using recent technology would vastly reduce the costs of maintaining security for both government and the private sector. However, this step is likely to take three years to complete.
The second step is establishing one-stop digital services to replace mandatory paperwork or in-person reporting. Many administrative procedures, such as reporting a change of personal address, require in-person appointments and physical paperwork. As in many other OECD countries, most administrative processes could be done online. When an individual reports their data to a government agency using a service, the data should automatically be shared with other institutions, reducing administrative costs by an estimated 20 per cent of the total 1.3 trillion yen currently spent on bookkeeping.
The third step is establishing a public-private sector partnership for digitalisation. Digitalisation would allow national and local governments to share identical digital IDs and individual information with the private sector in real time, so that the processes relating to income taxes, social security contributions, and transfer payments could be managed more efficiently. It is also helpful for pinpointing relief for those who suffer natural disasters or pandemics. There is plenty of room for the government to make significant use of private-sector innovation and technologies, since the information and communication technology industry accounted for only 9.4 per cent of GDP in 2019.
Utilising individual digital numbers
Japanʼs costly and time-consuming digital reforms will not be effective without accompanying initiatives in the private sector. The measure of success will be the extent to which firms or individuals adapt to government-initiated digitalisation. However, the Japanese public is not yet convinced of the need for a digital society.
Although most residents in Japan are provided with a “My Number” digital ID, the uptake of digital IDs has been slow, because digital IDs are not mandatory for the vast majority of financial transactions conducted by Japanese people. The proportion of people using their ‘My Number’ ID is still 56 per cent in October 2022, even six years after the scheme was introduced in 2016.
The government encourages people to utilise the digital ID by providing benefits of 20,000 yen for registering it with their health insurance card and bank account from June 2020, but so far the impact is limited. Eventually, the government should oblige people to use the digital ID with the individual’s name and address for all official and all financial transactions, much like social security numbers in the United States.
As the first step, Digital Minister Kono announced on October 13th that the current paper-based National Insurance Certificate will be replaced by the digital ID incorporating past medication records by the fall of 2024. Also, the timing of a driver’s license to be included in the individual digital ID will be forwarded from the original end of 2024. Those measures would likely accelerate the registration of the digital ID.
Despite the COVID-19 pandemic and remote learning, Japan’s classrooms are still underprepared for digital education. The digital infrastructure of institutions responsible for disaster relief, education, and healthcare is also underdeveloped. In 2019 only 19 percent of hospitals, clinics, and drug stores registered patients’ “My Number” IDs. The lack of adoption of digital infrastructure is likely due to the cost of transitioning; the government offers only minor compensation for
The economic impacts of digitalisation will be more significant when combined with the regulatory reform of existing arbitrary bureaucratic procedures, despite solid objections. First, all receipts requiring the reimbursement of healthcare costs by hospitals and clinics are currently checked by doctors in paper form in government offices. This process could be replaced by a digital process using automatic checklists based on the name of the disease and the medical treatment costs. This revision would improve efficiency and prevent the misuse of healthcare resources.
Second, the Telecommunication Ministry manages the allocation of existing transmission frequencies to various actors. As with other OECD members, this administrative procedure could be replaced by an auction market, so new firms with better business models could enter quickly and stimulate market competition.
Third, a similar logic can be applied to big airports with a long waiting list of airlines. New companies, mostly foreign ones, complain that domestic airlines have privileges, often resulting in international disputes. It is more efficient and fairer that the allocation of airport landing slots should be based on an auction process.
One of the merits of digitalisation is to find out the inefficiencies arising from the arbitrary bureaucratic procedures, which results in stimulating market competition and extra revenues for the government.
The crucial factor is how the government can ensure the digital safety of the general public under a rapidly proceeding digitalisation.
Although digitalisation increases official responsibility for securing individual privacy and information, the rules governing how the government can use citizens’ data without consent are not straightforward. For example, the idea of a “smart city” is where city authorities utilise peoples’ information to avoid congestion and better allocate public services to meet their demands. Also, the authorities currently only use personal digital numbers as supplemental information, because the scheme for assisting the digital support to an increasing number of older Japanese citizens is still insufficient.
The Act on the Protection of Personal Information was revised in April 2022. The major points of the revision are as follows:
- strengthening of the individual’s right to prohibit information-gathering firms from using their information when it is not adequately
- firms are obliged to notify the individual and the authorities when data is accidentally compromised or stolen;
- the penalty for violating the protection of individual data is almost doubled – in terms of both fines and imprisonment – and penalties for corporate firms are now higher than for individuals. Also, foreign firms in Japan are no longer exempted;
- finally, based on these measures for protecting individuals, the regulation of the private sector on using anonymous data is relaxed for broader utilisation.
To sum up, digitalisation in Japan has only just started. The government’s current plan is relatively modest, i.e., simply to replace traditional paperwork with electronic data and one-stop services for administrative procedures. However, what is more important is how to best utilise the government’s extensive database on a user-friendly platform for creating new private businesses. Also, the regulatory reform associated with digitalisation is key to making the Japanese economy more productive. It entirely depends on the leadership of the Kishida administration.
About the Author
Dr. Naohiro Yashiro is a specially appointed professor at the Showa Women’s University, Tokyo, Japan. Prior to joining SWU, he was President of the Japan Centre for Economic Research. He is co-editor of The Economic Effects of Ageing in the United States and Japan.